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The Way to Read Bollinger Bands

Updated: Dec 29, 2020

The basic strategy about Bollinger Bands, there’s a proper tool for each situation just like in trading, certain technical indicators are best used for particular environments or situations.

Bollinger Bands consists of a centerline and two price channels (bands) above and below it. The centerline is an exponential moving average; the price channels are the standard deviations of the stock being studied. The bands will expand and contract as the price action of an issue becomes volatile (expansion) or becomes bound into a tight trading pattern (contraction).

When stock prices continually touch the upper Bollinger Band®, the prices are thought to be overbought conversely, when they continually touch the lower band, prices are thought to be oversold, triggering a buy signal. By using Bollinger Bands, designate the upper and lower bands as price targets. If the price deflects off the lower band and crosses above the 10 days average (the middle line), the upper band comes to represent the upper price target. In a strong uptrend, prices usually fluctuate between the upper band and the 10 days moving average. When that happens, a crossing below the 10 days moving average warns of a trend reversal to the downside.

Here's an example,

This chart indicates the higher high and lower low of the point

When securities are traded actively it indicates an uptrend and if trades are quite lower it indicates the downtrend. You should notice how when the price is quiet, the bands are close together. When the price moves up, the bands spread apart.

"the band's contract and when the market is Heavy and the bands expand."

The upper and lower bands measure volatility or the degree in the variation of prices over time. Because Bollinger Bands measure volatility, the bands adjust automatically to changing market conditions.

In the next article, I will publish a write-up about Bollinger Bounce.

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